Binance Transferred $400 Million From A U.S. Partner To CEO’s Firm

Banking records and company messages show that Binance CEO Changpeng Zhao secretly accessed the bank account of its purportedly independent U.S. partner and transferred large sums of money from the account to a trading firm.

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Records reviewed by Reuters show that more than $400 million flowed from Binance.US's Silvergate Bank account to this trading firm, Merit Peak Ltd, during the first three months of 2021. According to the records, Binance.US was registered under the name of BAM Trading, the U.S. exchange's operating company. Merit Peak started receiving transfers in late 2020, according to company messages.

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Binance.US customers were not identified or if any of the money transferred belonged to them, Reuters could not determine. At the time, Silvergate and a Nevada-based custodian firm named Prime Trust LLC handled the exchange's dollar deposits. According to bank records, Prime Trust wire transferred $650 million into Binance.US's account during the quarter.

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In response to Reuters' questions about the transfers detailed in the bank records, a spokesperson for Binance.US, Kimberly Soward, did not reply to the questions. She stated in a statement that Reuters' reporting used "outdated information" in its reporting, without going into any further detail. Merit Peak neither trades nor provides any kind of service on the Binance.US platform. According to her, "only Binance.US employees have access" to the bank accounts of the U.S. company that it operates. Merit Peak's activities ceased at some point in the future, but Soward did not specify when this occurred.

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In response to detailed questions about the transfers, the Binance global exchange, Binance CEO Zhao, and Prime Trust did not provide any responses. Silvergate does not comment on individual customers, according to a spokesperson.

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In messages reviewed by Reuters, Binance.US executives expressed concern over the outflows because the transfers were taking place without their knowledge. Catherine Coley, CEO of Binance.US at the time, wrote to a finance executive at Binance in late 2020 asking for an explanation for the transfers.

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“Where did those funds come from? ” she wrote in one message.

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The Binance executive Susan Li replied to Coley without explaining the transfers. Li claimed Merit Peak was a "vendor that facilitated trading" on Binance.US, as well as a provider of loans and capital injections.

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Li and Coley did not respond to questions sent by their legal representatives after Coley left Binance.US in 2021.

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As of now, Reuters has been unable to locate the $400 million. An unspecified portion of the money was transferred to a Seychelles-incorporated firm called Key Vision Development Limited, according to a person with direct knowledge of the transfers. CEO Zhao was identified as a director of Key Vision in a 2021 filing by another Binance unit. Former Silvergate executives confirmed Key Vision held an account with Silvergate at the time.

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The local registered agent of Key Vision did not respond to a request for comment.

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It appears that the global Binance exchange, which is not licensed in the United States, controlled Binance.US's finances, despite the fact that Binance.US claims to be completely independent and functions as its “US partner.” It has been requested that Binance and Binance.US provide information about their relationship as part of ongoing investigations into potential financial rule violations, including whether Binance is using the American exchange to conceal doing business in the United States. This article was not commented on by the SEC or the Justice Department.

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To avoid scrutiny from U.S. regulators, Binance created Binance.US last year as a de facto subsidiary. BAM Trading Services, Binance.US's operator in California, is registered as a money services business by the U.S. Treasury, which includes foreign currency traders and money transmitters. Zhao is the beneficial owner of BAM.

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Trade Algo quoted Binance.US's chief financial officer, Jasmine Lee, as saying, "The extent of our relationship" with Binance.com is a shared name and a technology licensing agreement.

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Several senior Binance.US employees, along with Susan Li, had access to the Binance.US Silvergate account, according to the messages and the person with direct knowledge of the transfers. According to a Binance.US finance manager, Li was instructed to give another Binance.US employee authority to approve payments. In a 2021 Binance.US document, Silvergate was identified as a payment channel controlled by Binance.com at the time.

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Binance.US account records reviewed by Reuters’ cover transactions between January and March 2021. Other periods have not been reviewed.

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The transfers to Merit Peak took place on the bank's proprietary Silvergate Exchange Network (SEN), which Binance.US joined in November 2020 to serve its corporate clients. A Silvergate investor prospectus states that SEN transfers must be authorized by the account's controller. SEN transfers allow clients to transfer dollars between their accounts at Silvergate.

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A former Silvergate executive told Reuters that it would violate the bank's compliance rules to move funds from company accounts without the management's approval. The Silvergate spokesperson didn't address SEN transfers in their response to Reuters. Silvergate's prospectus says “multiple steps are required to create, authorize, and approve an SEN transfer.”

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The Binance.US account received $1.3 billion in SEN transfers from corporate clients trading on Binance.US, along with $650 million in wire transfer deposits from Prime Trust.

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Black Box

Since FTX collapsed in November, the role of trading firms at crypto exchanges such as Binance has come under scrutiny. A trading firm's role is often to facilitate dealing by buying and selling assets to increase the exchange's trading volume. Market makers profit from the difference between buyer and seller prices, or "spread."

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As a market maker on the exchange, Bankman-Fried's firm, Alameda Research, was accused by the SEC of secretly diverting billions of dollars from FTX customers. In its December complaint against Bankman-Fried, who has pleaded not guilty, the SEC alleged that Alameda received "undisclosed special treatment" on the FTX platform that concealed the flows.

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During an interview with Bloomberg TV on Feb. 10, SEC chair Gary Gensler said that crypto exchanges in general were "co-mingling customer funds with their businesses" by also operating as broker-dealers and hedge funds. Binance and other exchanges were not specifically mentioned in his comments, but he warned firms to expect more enforcement actions from the agency.

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“We don't allow the New York Stock Exchange to run a hedge fund and trade on the exchange. What would be the point of doing it here? ” Gensler said.

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Merit Peak, led by CEO Zhao, was one of the dealers on Binance.US, according to company messages.

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As part of the technology licensing agreement between Binance and Merit Peak, employees at Binance.US did not have any insight into how the trades were executed by Merit Peak, a person with knowledge of the transfers said. Binance.US managed the software that matched customer orders. According to ex-staff members, Binance.US employees had no idea how this software worked since it was described as a "BlackBox" in their technology architecture document.

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Former regulators, along with former executives at Binance and Silvergate, told Reuters that Merit Peak's role on Binance.US created possible conflicts of interest between the exchange and its customers because Binance.US failed to disclose Merit Peak's owner or its activities. Binance.US was subpoenaed by the SEC in December 2020 for information about Merit Peak, which is a Binance entity.

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“Without transparency, you don't know whether Binance customers are being disadvantaged,” said Howard Fischer, a former senior SEC trial counsel now with Moses Singer.

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In January 2019, Merit Peak was incorporated into the British Virgin Islands. Zhao and Merit Peak signed an agreement in December for Merit Peak to invest $1 million in Binance.US operator BAM Trading's holding company in exchange for preferred shares. Zhao was identified as Merit Peak's "Manager" in the agreement.

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Merit Peak's directors and shareholders are not listed in the BVI corporate registry; only its local registered agent is identified. A request for comment about Merit Peak's ownership was not responded to by the agent. As with Binance.US, Binance has not provided any public information about Merit Peak, nor has it been mentioned by Reuters in submissions to regulators and corporate registries.

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An unidentified "Market Maker" was under Binance.com's control in the 2021 technology architecture for Binance US. Zhao told a Twitter Spaces event last November that the market maker did not make profits and only provided liquidity.

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Binance.US's market makers, owners, and trading activity were all subject to an SEC subpoena addressed to Coley. Last year, the Wall Street Journal reported the subpoena. In response to the SEC complaint, Reuters was unable to find out how Binance.US responded.

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Although Binance.US and Binance did not reply to Reuters' questions about the SEC case, Patrick Hillmann, Binance's chief strategy officer, told the Wall Street Journal on Wednesday that the company is working with regulators to figure out what remediations are necessary to resolve investigations. Reuters previously reported that the Justice Department is investigating Binance for money laundering and sanctions violations.

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The bank Silvergate, used by Binance and other crypto exchanges, is also under scrutiny. Silvergate's hosting of Bankman-Fried's accounts is under investigation by the Justice Department's fraud section. The Justice Department and Silvergate declined to comment.

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“Steady Cash Drain”

Coley announced Binance.US's joining the Silvergate Exchange Network in November 2020, telling a crypto news outlet, “We’ve launched SEN for our corporate clients.”

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In a message to counterparts at Binance.com, a senior Binance.US employee said Merit Peak gave Binance.US $5 million to fund the "minimum balance" of the exchange's new SEN account. Merit Peak began transferring funds soon after, according to the messages.

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On Dec. 23, Coley flagged Merit Peak's withdrawal of $7.5 million from Binance.US as "very large". Merit Peak transfers were referred to as withdrawals by Binance.US staff, messages show that Binance.com employees initiated them.

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Coley wrote, "This is an unexpected transaction.". As a result, she informed Susan Li, who was named as the team leader of Binance's finance department in a company employee list that year, that Binance.US's SEN account had hit its daily withdrawal limit of $10 million and that she would raise the threshold to $20 million.

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Whenever the SEN account neared its limit, Coley asked Li to advise Binance.US staff. “Since we do not have portal access, could we have eyes and ears helping us?" she asked. Silvergate didn't identify the portal, but she says SEN accounts can be accessed via an "online banking portal."

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Later that day, Coley followed up with Li again. “Could you please explain more - perhaps by phone - about the SEN flows? As no one mentioned them until today when they got caught in our limit," Coley wrote.

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“Who is in charge of this? ” Coley asked, pointing out that other senior Binance.US employees were unaware of the transfers as well.

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In a message to Coley, Li explained that Merit Peak served as an "OTC vendor." She did not elaborate or directly answer Coley's questions.

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OTC trades are over-the-counter trades in which two parties agree on a price outside of an exchange. Reuters was unable to determine what trades Merit Peak was involved in. In a message seen by Reuters in early 2021, a senior Binance.US employee said Binance.com was sending crypto to Binance.US for American traders to buy, and then "withdrawing" the money. As a result, "steady cash drains" were occurring from SEN, despite a booming crypto market, the employee wrote.

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Merit Peak received 89 transfers totaling $404 million from the Binance.US SEN account from January to March 2021. A total of $160,000 was paid into the Binance.US account by Merit Peak during that time period.

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The transfers to Merit Peak were almost all for precise million-dollar figures, made every one or two days. Prime Trust, Binance.US's crypto custodian firm, often deposits funds into the Binance.US account after these transfers.

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According to the person with direct knowledge of the transfers, Merit Peak transferred funds from its Silvergate account to Key Vision's account.

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In its investigation, Reuters was unable to determine why the money was moved around in this manner.

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According to screenshots posted on a crypto blog, Binance.com also instructed international customers on its platform to deposit dollars into Key Vision's Silvergate account that year. Key Vision, incorporated the same day as Merit Peak, remains active and in "Good Standing" according to Seychelles' business registry.

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Binance.US unexpectedly announced in April 2021 that Coley would be replaced as CEO. No public statements have been made by her since she left.